5 Japanese Companies That May Be Materially Undervalued

In our recent article on Japan, we argued that investors should take a closer look at Japanese equities following this year's earthquake. In this article we highlight five companies that deserve closer consideration by investors looking for long-term value:

Konami (NYSE:KNM) ($24 per share; market value (MV) $3.5 billion; enterprise value (EV) $3.4 billion) develops video game software for the major stationary and portable console platforms, PCs, and mobile phones. Operating income rose 11% from $236 million in the fiscal year ended March 31, 2010 to $263 million in FY11, while revenue decreased 2% during the period. The Street expects Konami to earn $1.27 per share in FY11 (19x P/E), with $1.47 (16x) and $1.62 (15x) in each of the next two years, respectively. According to management, Konami's "operating environment remains challenging, but through rapid decision making and a strengthened focus on cash flow management, we have bolstered our financial position and enhanced our earnings capability."

Panasonic (PC) ($12 per share; MV $31 billion; EV $38 billion) is one of the world’s biggest makers of consumer electronics, selling a wide range of products under the Panasonic brand and, since January 2010, under the Sanyo brands. Sales in the Digital AVC Networks segment, which includes audio and video as well as information and communications equipment, decreased 3% from ¥3,410 billion in the fiscal year ended March 31, 2010 to ¥3,304 billion in FY11, while total revenue rose 17% to $107 billion during the same period. Analysts expect Panasonic to earn $0.54 per share in FY11 (23x P/E), with $0.07 (>99x) and $0.92 (13x) in subsequent years. Panasonic has large holdings of real estate in Japan, providing long-term downside protection for the shares.

Ricoh (OTCPK:RICOY) ($57 per share; MV $8.6 billion; EV $14 billion), based in Tokyo, Japan, is a manufacturer of office automation equipment, including copiers, printers, production printing products and fax machines. Ricoh also makes digital and advanced electronic devices such as semiconductors. Operating income declined 9% from $835 million in the fiscal year ended March 31, 2010 to $762 million in FY11, while revenue decreased 4% during the same period. The Street expects Ricoh to earn $2.76 per share in FY11 (21x P/E), followed by $2.39 (24x) and $3.07 (18x) in the following years. The company trades at 1.2x tangible book value of $7.1 billion. The annual dividend of $2.00 per share, a decrease of 2% from a year ago, implies a yield of 3.5%. Ricoh has boosted the dividend three times in the past seven years, with average annual dividend growth of 9% in the period.

Sony (NYSE:SNE) ($27 per share; MV $28 billion; EV $19 billion) is one of the world's leading consumer electronics companies, providing TVs, notebooks, PlayStation video game consoles, and many other types of electronics. The company also sells semiconductors and components. Television revenue rose 19% from $13 billion in the fiscal year ended March 31, 2010 to $15 billion in FY11, while total revenue remained roughly flat at $89 billion in the same period. The Street expects Sony to earn $1.36 per share in FY12 (20x P/E) and $1.87 in 2013 (14x). The company has $8.5 billion of net cash (31% of market value) and $21 billion of tangible book value. Adjusting for net cash would bring the estimated P/E ratio down to 5x for the fiscal year ending March 31, 2012, 4x for FY13 and n/a for FY14.

Toyota (NYSE:TM) ($84 per share; MV $147 billion; EV $257 billion) is a leading global automaker. The number of vehicles sold worldwide stayed roughly flat year-over-year at 7.3 million in FY11, while revenue remained roughly flat at $235 billion during the period. The Street expects Toyota to earn $3.04 per share in FY12 (28x P/E) and $6.53 in 2013 (13x). The company trades at 1.2x tangible book value of $128 billion. Toyota’s primary markets based on vehicle unit sales for FY 2011 are Japan (26%), North America (28%), Europe (11%) and Asia (17%).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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